A dramatic series of events related to small-dollar value, short-term credit has unfolded over the last 18 months. Legislators, regulators, and the financial services industry have been closely scrutinizing the payday loan industry and creating market incentives for private-sector innovation. As a result, the landscape has changed.

Consumers have always needed small amounts of credit, although that need has been filled in different ways. In the United States, the marked for short-term, small- dollar credit has a long history. As banks over stepped away from these small-dollar loans in favor of credit cards and overdraft-type services, alternative providers arose to meet the demand. Evolving from personal finance companies, payday lenders had developed into the dominant source for such loans by the 1990s.

Consumers have paid a high toll for the rise of payday lenders. With fees generally ranging from $15 to $30 for every $100 borrowed and a repayment structure that can lead to frequent loan flips, a short-term loan can easily turn into a long-term problem. In response to the recent scrutiny, the FDIC has established guidelines and a pilot loan program to encourage banks to offer payday alternatives as a business opportunity that would also earn Community Reinvestment Act credits. The need for increased innovation will continue to grow as the regulatory environment makes it more difficult for payday lenders to operate.